We Should Be Friends: Community Banks and Fintech Companies

Community banks play an essential role in the American financial system – they provide the majority of small business and farm loans, as well as mortgage and general banking services. In addition, community banks remain one of the few types of financial institutions the average citizen and member of Congress do not vilify. In this new and exciting time in financial innovation, community banks also serve an important role as incubators for new fintech products and services. Community banks and fintech companies can seem like strange bedfellows, after all, bigger banks have the opportunity to create their own technology or buy fintech companies with interesting technology or ideas. However, smaller banks are more flexible and offer fintech companies the same perks as any bank relationship.

A relationship between a community bank and a fintech company can be a good deal for both sides. For the community bank, there is increased access to new technology, the potential for an expanded customer base (including the under- and unbanked) and likely increased public interest in the bank. For the fintech company, a community bank provides all the perks of any bank relationship: the potential to avoid licensure, a cheaper source of funding for loans, and to get to market more quickly. A community bank relationship can also provide the company increased understanding of the U.S. financial regulatory system and tend to have much more accessible and flexible third party relationship policies. It is a win-win.

The Fintech Win. As an alternative to a community bank relationship, fintech companies, from online marketplace lending to new payment systems, can opt for the new special purpose national bank charter (when available) or a fifty state licensing solution if activities include a regulated activity. Either of those options would take a lot of capital and time, not only for the license or charter, but for ongoing compliance costs in a very complex regulatory system.

A community bank has experience and knowledge of the regulatory landscape and will require the fintech company to meet certain compliance obligations as a third party vendor, can provide the fintech company with an education and a sort of trial run to see if the company would like to explore independent status as a regulated financial services company. This is of particular value given the uncertain regulatory status of fintech companies. The federal bank regulators have all expressed interest in the present and future state of fintech regulation from safety and soundness and consumer protection standpoints. The Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency are conducting outreach to fintech companies, but states are moving toward regulating payments and virtual currency. The Trump administration seems agnostic, bordering on disinterested, in fintech. It is focused on rolling back many of the recently implemented changes the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is a source of both delight and concern for the financial services industry. Fintech companies may seek the relative safety of bank partnerships.

Community banks have the same regulatory obligations as large banks, but are more agile because they do not have to ensure billions of dollars, thousands of employees, and millions of customers are protected, satisfied, and interested. A fintech company can approach a community bank and meet with the bank president and other decision makers early in the negotiation process and can collaborate with the bank compliance team and management to ensure their product matches the bank’s customer needs while keeping safety and soundness in sight. In a big bank, there are layers of bureaucracy to deal with, any agreement would take an extended period to negotiate, and the fintech company representatives are likely to never meet with the bank president.

Community Bank Win. Banks, especially smaller community banks are struggling to find a competitive edge in the shifting environment of consumer financial services and banking, more generally. Customers expect immediate action on many fronts: remote deposit capture, a useful phone app that will provide current account information, quick credit decisions, and a responsive staff in case of issue. Some community banks struggle both to adopt the required technology and to anticipate where the bank will need to expend resources next. Partnering with a fintech company allows the bank access to new technology and technologically savvy people. Compliance obligations for third party vendors (or third party lending relationships) can be built into the product, which can make the fintech company more marketable to other banks and provide comfort to the bank regarding its compliance obligations.

Fintech companies are the talk of the town right now, but the simplest, fastest, and smartest option for taking new fintech products or services to market may be to forge a relationship with a trusted community bank. Becoming the front line in financial innovation will allow community banks to continue to be a critical part of the American financial system while fostering a culture of compliance, an understanding of the importance of safety and soundness, and community engagement in the new fintech entrants into financial services arena.